The FTSE 100 Index has fallen 110.7 points to 3628.7, its lowest level since August 1st, 1996.
Banks, insurers and telecoms are all being hit as fears of military strikes on Iraq added to the concern about the economy.
Fears about bad debts has hit banks, with HBOS down 9 per cent or 59p to 582'p, Royal Bank of Scotland dropping 58p to £11.73 and Barclays sliding 8 per cent or 29'p to 336'p.
Insurers are also falling with Royal & Sun Alliance off 4p to 91'p, Prudential down 13'p at 319'p and Aviva off 6'p to 335p.
Vodafone has fallen 3 per cent, down 3p at 81'p, and elsewhere in the telecoms sector mmO2 has fallen 'p to 39p while BT has plunged 11'p to 160'p.
Oil companies are also slipping back, reversing early gains following a surge in the oil price. BP has fallen 4'p to 428p while Shell has dropped 3p at 374p.
Building materials group Wolseley has suffered on concerns about its US arm and is down 39p to 482p despite strong half-year figures.
Only nine blue-chip stocks are making any progress, among them Morrisons, up 2'p at 212'p and Man, up 34p at £10.05.
Among smaller stocks in London, former FTSE 100 group Electrocomponents has fallen 9 per cent, or 24p to 245p after warning of lower half-year profits.
And Signature Restaurants has dived 11%, or 5'p to 42'p after warning it saw little respite from tough trading conditions in London.